Thinking Of Buying Essential Properties? Here Are The Properties And Tenants You'd Add To Your Portfolio


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Real estate investment trusts (REITs) have been wonderful investments over the years, despite recent difficulties resulting from inflation and interest-rate hikes. But it’s important to consider the properties, tenants and contractual agreements that comprise the largest percentage of a REIT’s business.  

Take a look at one REIT whose single-property tenant base is well diversified and whose performance has been superior to most REITs this year.

 Essential Properties Realty Trust Inc. EPRT is a Princeton, New Jersey-based diversified REIT that owns and manages single-tenant properties it net-leases to service-oriented and experience-based businesses.

Essential Properties was founded in 2016 and has a market cap of $3.44 billion. Its portfolio includes 1,653 properties across 48 states.

Essential Properties has a total return of 4.16% year to date and a five-year total return of 106.22%. Its 90-day average volume of 948,900 shares per day ranks it near the top of all REITs for average volume per day. Its 52-week range is $18.88 to $26.75.

Essential Properties has a diversified mix of 350 middle-market (businesses earning $10 million to $1 billion in annual revenue) tenants. These are smaller, non-investment-grade tenants that are often ignored by other net-lease REITs. Essential Properties engages in sale-leaseback arrangements with about 88% of these tenants. This allows it to enact more favorable terms, such as rent escalations, financial reporting and long-term leases.


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Its weighted-average lease term of 13.9 years is well above average for net-lease REITs. Most of its leases do not expire until between 2031 and 2038.

Essential Properties’ top 10 tenants by percentage of cash average base rent are:

 

EquipmentShare 3.4%         

Chicken N Pickle 1.9%

Captain D’s 1.8%  

WhiteWater Express Car Wash 1.7%

Cadence Education 1.7%       

Festival Foods 1.6%

Five Star Parks & Attractions 1.6%      

Mammoth Holdings 1.5%

Mister Car Wash 1.5%      

Spare Time Entertainment 1.5%

 

Equipment Share is a fast-growing private company with 3,422 locations and over 4,000 employees. It offers construction and manufacturing professionals equipment rentals with built-in telematics that offer data on vehicle activity and engine diagnostics.

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Captain D’s is a casual dining seafood restaurant that has been in business for over 53 years. The first Captain D’s opened in Donelson, Tennessee in August 1969. The original name of Mr. D’s Seafood and Hamburgers was shortened to Captain D’s in 1974, and the company began focusing more on seafood. Today, 542 Captain D’s U.S. locations employ more than 6,000 people.

Cadence Education is a Scottsdale, Arizona-based private pre-school, elementary school and infant and toddler daycare provider with more than 300 locations and 533 employees in the United States. It’s been in business for over 30 years. It also offers summer programs, Montessori schools and other programs.

Car washes account for the largest percentage of Essential Properties’, followed by early childhood education, quick-service restaurants and medical/dental services. Other tenants include automotive services, casual dining, convenience stores, equipment rental and sales, entertainment venues and grocery stores.

Its diversified mix of tenants from 16 industries helps reduce the risk of recession-induced vacancies. Its top 10 tenants comprise only 19.4% of its average base rent. About 85% of its leases are repeat business from pre-existing tenants. The average purchase price of its properties is $2.4 million, one of the lowest among retail REITs.

Essential Properties has a property lease rate of 99.9%. That’s 1.1% better than industry leader WP Carey Inc. WPC and just under 1% better than stalwart Realty Income Corp. O.

In an effort to prevent rent defaults, Essential Properties receives ongoing unit-level financial reporting from 98.5% of its tenants. It has contractual rent increases with over 95% of its tenants, but its average annual increase is under 2%. In the present inflationary environment, this could be a negative for Essential Properties, but the model has served it well over time during lower inflation years.

The following chart breaks down the diversification of Essential Properties’ tenant base, as of the end of 2022:

Owning smaller, less expensive properties allows Essential Properties to limit expenses during tenant turnover and makes acquiring new tenants much easier.

Over the past year, Essential Properties has disposed of properties with cap rates between 6% and 6.3%, while the properties it acquired have had cap rates above 7.5%. In the fourth quarter of 2022, Essential Properties sold 25 properties worth approximately $75.5 million — more than twice the number and value of what it sold in the previous quarter.

Essential Properties has been disposing of weaker properties at profitable prices while the value of its assets and potential future revenue has been steadily growing.

Essential Properties’ debt levels also are manageable. Its weighted average interest rate is only 3.3% and its weighted average debt maturity is 5.2 years. No debt matures until April 2024.

On Feb. 15, Essential Properties announced its fourth-quarter operating results. FFO of $0.39 was in line with Street estimates and in line with FFO in the fourth quarter of 2021. Revenue of $74.27 million was slightly higher than analysts’ estimates and 18.56% above revenue of $59.6 million in the fourth quarter of 2021.

Over the past 30 days, Essential Properties has received coverage by two analysts. On March 9, Mizuho Securities USA analyst Haendel St. Juste maintained a Buy rating on Essential Properties and raised the price target from $26 to $27. On March 23, Ladenburg Thalmann analyst John Massocca maintained his Buy rating on Essential Properties but lowered his price target from $28 to $27. From a recent price of $23.82, that represents potential appreciation of 13.3%. 

Essential Properties Trust pays a quarterly dividend of $0.275 per share. The annual dividend of $1.10 yields 4.62%. The payout ratio on its forward funds from operations of $1.66 is 66.2%, still within a comfortable margin of safety. The dividend has grown 30.9% since December 2018 and has been raised seven times.

While there are a few risks with Essential Properties Trust, such as its small contractual rent escalation rate should higher inflation continue for several years, few REITs can provide high levels of both growth and income over several years, while maintaining such a high level of tenant occupancy.

Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.

 

 

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